CAN WE HARVEST OCK YET?

Nope, never go harvest for durian when it is not ripe.  The season is still early. Why, still planting new trees, still increasing yield and possible acquisition of new plantations.

NEW SEGMENT

If we look at OCK (the NEW SEGMENT start revenue in 2017) called INDEPENDENT TOWER BIZ (OWN and LEASEBACK) is still in infancy or immature stage (in plantation terminology).

Why?

1)  Number of towers/BTS is still in growing mode (existing (2017) about 3,000 tower/BTS, targeted 5,000 towers/BTS in next few years) 

Where the growth of towers came from?

(a) to build remaining 300 towers for Telenor (Myanmar)

(b) to build  300 new towers for Mytel (Myanmar)

(c) to build 200-300 new BTS for SEATH (Vietnam subsidiary)

(d) Possible furthe M&As

2)  Tenancy ratio is also in growing mode (from 1.0x to 1.2x to 1.4x ....... for Myanmar).

(a) 1Q2017 - MPT become the second tenant for OCK Myanmar, for about 90 towers

(b) 3Q2017 - Mytel become third tenant for OCK Myanmar

(c) OCK Myanmar continuing to get new tenants (or improving its tenancy ratio for its exisiting towers)

(d) OCK Myanmar tenancy ratio 1Q is about 1.15x, in Myanmar, tenancy can grow as high as 1.6x to 1.9x. (Each tower can take up to max of 3 tenants)

(e) Similarly, OCK Vietnam or SEATH is increasing its tenancy ratio gradually + improving its efficiency (previously held by private equity, may not be cost efficient as an operator).

WHAT IS THE USEFUL LIFE OF TOWERS & BTS?

Useful life (for accounting) in Myanmar is 20 years, and in Malaysia is 25 years.  But a well maintain tower can last more than 30 years (depending what material and maintenance you do) in the real world.  (similar to plantation, some say can last 25 years, some extend it to 30 years, so is shipping).  So, accounting and reality is different, hence, cash flow can last longer than expected.

In Vietnam, the accounting useful life given to BTS is 8-10 years.  Again, if you ask different expert,  you have different answer.  In reality, it may last longer than that.

This means, the profit & loss is decided by accounting estimates.  Tower owner knows it is more than that.  That's why in this biz, EBITDA multiple is used (generally accepted), because profit and loss is understated.  A depreciation of RM300m towers using 20 years is RM15m p.a., if we depreciate using 30 years, it is only RM10m p.a. (in Telenor case, it lease back from OCK for 27 years, why use 20 years depreciation rate? To comply with accounting standards.

TOWER BIZ, as per RHB is worth about RM550m. (using DCF)

INVESTED EQUITY COST about RM200m (2.75x - conservative).

EXISTING SEGMENT

Includes, maintenance, design and build towers, laying fiber, trading, engineering (electrical), solar (making about RM4m for 2017), total make about RM29m and growing 5-15%.  The shareholders funds attributable to this biz is about RM220m (about half of SF @ 31 March 2017 of RM420m).  So the ROE is about 13%.

EXISTING BIZ, as per RHB is worth about RM600m (using PE 16x)

RHB VALUATION @ 10 AUGUST 2017

TOTAL VALUE OF 2 SEGMENTS = RM1,150M 

Total number of share in issue 871 million (did not use fully diluted as it is impractical to assume conversion when warrant is trading at about 13-15% premium).

VALUE per share = RM1.32 per share 

SO, IF RHB IS RIGHT, HOW MUCH IS THE WARRANT WORTH?

RM1.32 X 110% = RM1.45 per share (assuming warrants enjoy a 10% premium since there is more than 3 years to expiry).

Warrant price = RM1.45 less RM0.71 (exercise price) = 74 sen

Warrant closed on 18 August 2017 @ 31 sen.

SO, IS OCK RIPE FOR HARVESTING YET?

So, today is 31 sen, the TP is 74 sen.  Well, upside still there.

WHAT IF WE TAKE A VERY CONSERVATIVE VIEW TO DISCOUNT 20% OF RHB'S VALUE? updated 20 Aug 2017

1)  RHB VALUE = RM1,150M

2)  DISCOUNT 20% = RM230M

3)  ADJUSTED VALUE = RM920M/871 = RM1.06/sh

4)  WARRANT PRICE WITH 10% PREMIUM (RM920 X 1.1) = 1,012/871 = RM1.16 less exercise price of 71 sen = warrant = 45sen

5)  CONSERVATIVE PRICE is 45 SEN.  

6) RANGES OF PRICE = 45 sen, 55 sen, 65 sen to 75 sen vs today's 31 sen (upside 45% to 140%)